Real estate credit: private and commercial real estate financing
A real estate loan is the financing of a property through a loan. The real estate loan is an essential component for the construction or renovation of houses or structures.
A distinction is made between private and commercial real estate financing. Private real estate financing is a loan for private individuals that is used to acquire or build owner-occupied residential property.
The other option is to buy property as an investment. A distinction is therefore made between owner-occupier financing, the most common form of credit granted for real estate, and financing as an investment. This is investor financing. Here the financier is the landlord of the property and does not necessarily live in it. The property is bought for rent, the rental income, which is primarily needed to repay the real estate loan, can later be used to build up assets.
Financing private real estate
First of all, of course, equity can be brought in, as is the case with savings or liquidable securities. In addition, employee savings allowances, state subsidies, promotional programs of the Best Bank or residential residents can also be claimed.
There are also various types of loans. These are the real estate loans. These can be provided by banks, state funding institutes, building societies or insurance companies. However, all lenders require an approval according to the German Banking Act in order to grant commercial real estate loans.
However, loans from employers or other private individuals can also be used to finance real estate. The special thing about real estate financing is the real estate lien, which is usually required through a land charge on the mortgage object to be financed.
Taking out a real estate loan
Lenders see the real estate loan as the loan that has the lowest default risk. The loans are secured by a mortgage or a mortgage. However, it may happen that the remaining obligations cannot be settled by selling the house. This is often the case with foreclosures.
If the fixed interest rate expires, changed real estate prices can pose a further risk. If property prices fall, the loan may no longer be secured. In such a case, if the mortgage lending value is lower than the remaining debt, the lender may request additional security or risk premiums.
If there is no match between the borrower and the lender, the lender has the right to terminate the real estate loan. The borrower now has the right to look for another lender within a certain period. If this search is unsuccessful, the lender has the right to sell the property after the deadline, i.e. to sell it.
Repayment of the real estate loan
In the case of a real estate loan, the loan granted must be repaid within a certain period of time. The repayment takes place on the one hand through the repayment and in the form of interest.
Annuity loans are mainly granted for real estate loans. The repayment shares flow into the remaining loan. In this way, the interest burden is reduced in the course of the financing.
As a rule, the annuity loans are not concluded for the entire period that would be required for payment. In Germany, contracts between 5 and 15 years are concluded as part of the fixed-term interest period. The shorter the time period, the higher the risk for the borrower if the interest rate rises.
Not only the usual repayments can be agreed between the lender and the borrower. Suspension of repayment may also be possible. If the repayment is suspended, the borrower pays the interest. The redemption rates, on the other hand, flow into a redemption surrogate. The repayment portions are saved here and used to repay the loan amount at the end of the repayment period.
Redemption surrogates can be pension insurance, life insurance, or mutual funds. The home loan can also be used as a repayment option. Once allocated, this too has the character of an annuity loan. In the case of newly concluded home savings income, the home savings sum is completely pre-financed up to its allocation.
Risks and opportunities of private property purchases
Buying or building a property can lead to an increase in assets. In the worst case, however, there may also be a loss of assets. Indeed, the key to the success of wealth creation is the direct comparison of the development of wealth when buying a property versus how the wealth would develop if it were rented.
If the advantages prevail here, then the purchase of this property makes sense. When buying the property there is a rent saving. In addition, the increase in the value of real estate can be counted among the advantages of the purchase.
However, the credit and maintenance costs are disadvantageous and risky. Real estate owners should never lose sight of the risk of losing value. In order to actually achieve a return, the location of the property should be carefully examined. When renting out the property, it does not always necessarily mean that a secure return can be achieved.
If properties are acquired in poor locations and with poor construction, mostly no rental income can be earned. The risk here clearly lies in the fact that the desired return on the capital brought in cannot be achieved at all. In addition, possible vacancies in the course of the holding period of the property cause losses. When such properties are resold, there is usually a further serious loss. Especially with tightly calculated real estate loans, this can lead to financial ruin.
Consumer protection rules for private real estate loans
Real estate purchases and their financing are legal transactions in which immense sums of money are moved. As a rule, the sum of the financing exceeds the annual income of the borrowers many times over. As a result, there are a number of legal requirements for the financing of private real estate.
First of all, the purchases of real estate and the ordering of mortgages must be notarized. But there are also consumer protection rights for the loan agreement, which the lender must comply with.
The right of withdrawal is an integral part of consumer protection rights. The lender must notify the borrower of the right of withdrawal. It is not sufficient to list this right of withdrawal in the contract. Private borrowers also have legal protection if they fall behind with their installments. This does not mean that the loan cannot be canceled at all. However, lawmakers protect private borrowers from being seduced.
Due to the Risk Limitation Act, which came into force in 2008, the borrower may only terminate the loan if he is behind with 2.5% of the loan amount. As a result, with a conventional construction loan that bears interest at 5% and has an initial repayment of 1%, the borrower can be in arrears for five months without the real estate loan being terminated by the bank. In addition, the options for realizing the property by the lender were restricted by the Risk Limitation Act.
Tax treatment of real estate loans
The national markets for real estate loans are shaped by the tax framework. If national tax law grants tax reductions for real estate loans, this can be an incentive to buy a property and to bring in as little equity as possible for this.
In Germany, the taxation of real estate financing depends on the use of the real estate. If the property is rented or leased, this income is subject to income tax. However, interest or fees can be deducted as advertising costs for the rented properties. The rental income is thus reduced by the costs of the financing.
Special legal regulations apply to rentals to close relatives. For relatives, the rental price may be reduced to 66% of the local rent. The tax deductibility of interest is not affected. In the case of private and owner-occupied houses, the financing costs for the real estate or other expenses for the real estate in Germany cannot be used for tax purposes. The rent savings are also not relevant for the taxpayers.